Do R

1
Do RD tax credits work? Evidence from an
international panel of countries 1979-94.Work
in Progress April 1998

• Nicholas Bloom
• Rachel Griffith
• John Van Reenen

2
Policy Issues

• Substantial annual cost of current RD tax
  measures
• 1bn estimated annual revenue loss from RD tax
  credit in USA.
• 1bn estimated annual revenue loss from RD tax
  measures in EU.
• Japan and Australia also have tax credits.
• Other countries such as the UK and Germany
  considering an RD tax credit.

3
Economic Issues

• Early studies indicated that RD was not very
  sensitive to RD tax incentives
• More recent studies indicate a much greater
  response. However, one country studies
• problems disentangling tax policy and macro
  shocks
• within firm variation in after tax price
  endogenous (?)
• generalisable to other countries (?)

4
Whats new in this paper?

• Extend analysis to more countries
• RD tax changes as natural experiments
• Appropriate RD data
• recorded on the basis of where it is conducted
• consistent definition across countries
• not tax data so not so susceptible to relabelling
• Business RD data by source of funding

5
Tax Data

• New data set developed at the IFS which
  constructs a user cost of RD, reflecting
• general features of the tax system
• treatment of cross border flows
• special treatment of RD investment including tax
  credits and accelerated depreciation allowances
• Eight countries studied over 16 year, 1979-1994.
• Five with some kind of RD tax promotion
  Australia, Canada, France, Japan, and the USA
• Three without any major RD tax promotion Italy,
  Germany, and the UK

6
The User Cost of RD(without inflation or
exchange rates)
7
User cost of RD
8
Tax variation in user cost
9
RD data

• OECD data on RD.
• business conducted RD (BERD)
• manufacturing sector
• government survey data based on common Frascati
  definition.
• deflated by 50 wages and 50 GDP deflator.

10
Manufacturing BERD/ Manufacturing output
USA
Japan
Germany
France
UK
Canada
Australia
Italy
11
RD data

• OECD MSTI data on the funding breakdown of
  business conducted RD (BERD) into
• domestic business financed BERD
• foreign business financed BERD
• government financed BERD

12
(No Transcript)
13
Table 1 from paper
14
The model
lag
business funded business RD
user cost of RD
country specific effect
output
time specific effect
15
Relocation?

• Is the impact of RD tax credit only to change
  level of domestic RD?
• Is there also an impact through relocating RD
  done by multinational firms?

16
Adding in foreign tax price
domestic user cost
foreign user cost
indicates in favour of relocation
17
Measuring foreign tax price
Foreign Direct Investment from country i to
country j
User cost of RD for investment from country i to
country j
18
Table 2 from paper
19
Conclusions

• Using tax changes as exogenous changes to the
  user cost of RD we find an impact elasticity of
  around -0.1 and long-run elasticity or around
  -1.0
• Evidence suggests that the location of RD may be
  affected by tax-induced changes to the cost of
  RD, maybe some tax rivalry